Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

fisi-10q_20200331.htm

Table of Contents

 

0.21

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended              March 31, 2020            

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number:     000-26481     

 

 

(Exact name of registrant as specified in its charter)

 

 

New York

  

16-0816610

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

 

220 LIBERTY STREET, WARSAW, New York

  

14569

(Address of principal executive offices)

  

(Zip Code)

 

(585) 786-1100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

FISI

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No      

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

    

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes     No   

The registrant had 16,019,384 shares of Common Stock, $0.01 par value, outstanding as of May 1, 2020.

 

 


Table of Contents

 

FINANCIAL INSTITUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2020

TABLE OF CONTENTS

 

 

 

PAGE

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition (Unaudited) - at March 31, 2020 and December 31, 2019

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income (Unaudited) - Three months ended March 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) - Three months ended March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three months ended March 31, 2020 and 2019

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2020 and 2019

 

8

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

9

 

 

 

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

41

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

58

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

59

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

60

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

60

 

 

 

 

 

ITEM 6.

 

Exhibits

 

61

 

 

 

 

 

 

 

Signatures

 

62

 

 

 

- 2 -


Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1.      Financial Statements

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

 

(Dollars in thousands, except share and per share data)

 

March 31,

2020

 

 

December 31,

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

152,168

 

 

$

112,947

 

Securities available for sale, at fair value

 

 

444,845

 

 

 

417,917

 

Securities held to maturity, at amortized cost (net of allowance for credit losses of $13 and $0, respectively) (fair value of $354,571 and $363,259, respectively)

 

 

346,239

 

 

 

359,000

 

Loans held for sale

 

 

3,822

 

 

 

4,224

 

Loans (net of allowance for credit losses of $43,356 and $30,482, respectively)

 

 

3,193,871

 

 

 

3,190,505

 

Company owned life insurance

 

 

69,414

 

 

 

68,942

 

Premises and equipment, net

 

 

41,426

 

 

 

41,424

 

Goodwill and other intangible assets, net

 

 

74,629

 

 

 

74,923

 

Other assets

 

 

145,354

 

 

 

114,296

 

Total assets

 

$

4,471,768

 

 

$

4,384,178

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

732,917

 

 

$

707,752

 

Interest-bearing demand

 

 

724,670

 

 

 

627,842

 

Savings and money market

 

 

1,270,253

 

 

 

1,039,892

 

Time deposits

 

 

1,059,345

 

 

 

1,180,189

 

Total deposits

 

 

3,787,185

 

 

 

3,555,675

 

Short-term borrowings

 

 

109,500

 

 

 

275,500

 

Long-term borrowings, net of issuance costs of $709 and $727, respectively

 

 

39,291

 

 

 

39,273

 

Other liabilities

 

 

96,399

 

 

 

74,783

 

Total liabilities

 

 

4,032,375

 

 

 

3,945,231

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Series A 3% preferred stock, $100 par value; 1,533 shares authorized;

   1,435 shares issued

 

 

143

 

 

 

143

 

Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized;

   171,847 shares issued

 

 

17,185

 

 

 

17,185

 

Total preferred equity

 

 

17,328

 

 

 

17,328

 

Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued

 

 

161

 

 

 

161

 

Additional paid-in capital

 

 

124,445

 

 

 

124,582

 

Retained earnings

 

 

301,243

 

 

 

313,364

 

Accumulated other comprehensive loss

 

 

(2,082

)

 

 

(14,513

)

Treasury stock, at cost – 80,172 and 96,657 shares, respectively

 

 

(1,702

)

 

 

(1,975

)

Total shareholders’ equity

 

 

439,393

 

 

 

438,947

 

Total liabilities and shareholders’ equity

 

$

4,471,768

 

 

$

4,384,178

 

 

See accompanying notes to the consolidated financial statements.

 

- 3 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

 

(In thousands, except per share amounts)

 

Three months ended

March 31,

 

 

 

2020

 

 

2019

 

Interest income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

36,860

 

 

$

36,466

 

Interest and dividends on investment securities

 

 

4,582

 

 

 

4,946

 

Other interest income

 

 

211

 

 

 

102

 

Total interest income

 

 

41,653

 

 

 

41,514

 

Interest expense:

 

 

 

 

 

 

 

 

Deposits

 

 

7,019

 

 

 

6,799

 

Short-term borrowings

 

 

892

 

 

 

2,305

 

Long-term borrowings

 

 

618

 

 

 

618

 

Total interest expense

 

 

8,529

 

 

 

9,722

 

Net interest income

 

 

33,124

 

 

 

31,792

 

Provision for credit losses

 

 

13,915

 

 

 

1,193

 

Net interest income after provision for credit losses

 

 

19,209

 

 

 

30,599

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges on deposits

 

 

1,587

 

 

 

1,680

 

Insurance income

 

 

1,349

 

 

 

1,378

 

ATM and debit card

 

 

1,602

 

 

 

1,443

 

Investment advisory

 

 

2,246

 

 

 

2,216

 

Company owned life insurance

 

 

465

 

 

 

410

 

Investments in limited partnerships

 

 

213

 

 

 

232

 

Loan servicing

 

 

7

 

 

 

110

 

Income from derivative instruments, net

 

 

746

 

 

 

168

 

Net gain on sale of loans held for sale

 

 

304

 

 

 

182

 

Net gain (loss) on investment securities

 

 

221

 

 

 

(53

)

Net gain on other assets

 

 

64

 

 

 

49

 

Loss on tax credit investments

 

 

(40

)

 

 

-

 

Other

 

 

1,198

 

 

 

1,305

 

Total noninterest income

 

 

9,962

 

 

 

9,120

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

15,014

 

 

 

14,001

 

Occupancy and equipment

 

 

3,756

 

 

 

3,473

 

Professional services

 

 

2,152

 

 

 

1,158

 

Computer and data processing

 

 

2,673

 

 

 

2,336

 

Supplies and postage

 

 

553

 

 

 

534

 

FDIC assessments

 

 

372

 

 

 

512

 

Advertising and promotions

 

 

555

 

 

 

520

 

Amortization of intangibles

 

 

294

 

 

 

323

 

Other

 

 

2,353

 

 

 

2,314

 

Total noninterest expense

 

 

27,722

 

 

 

25,171

 

Income before income taxes

 

 

1,449

 

 

 

14,548

 

Income tax expense

 

 

322

 

 

 

3,027

 

Net income

 

$

1,127

 

 

$

11,521

 

Preferred stock dividends

 

 

365

 

 

 

365

 

Net income available to common shareholders

 

$

762

 

 

$

11,156

 

Earnings per common share (Note 2):

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

$

0.70

 

Diluted

 

$

0.05

 

 

$

0.70

 

Cash dividends declared per common share

 

$

0.26

 

 

$

0.25

 

 

See accompanying notes to the consolidated financial statements.

- 4 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

(Dollars in thousands)

 

Three months ended

March 31,

 

 

 

2020

 

 

2019

 

Net income

 

$

1,127

 

 

$

11,521

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities

 

 

12,106

 

 

 

5,503

 

Hedging derivative instruments

 

 

91

 

 

 

(254

)

Pension and post-retirement obligations

 

 

234

 

 

 

261

 

Total other comprehensive income, net of tax

 

 

12,431

 

 

 

5,510

 

Comprehensive income

 

$

13,558

 

 

$

17,031

 

 

See accompanying notes to the consolidated financial statements.

- 5 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Three months ended March 31, 2020 and 2019

 

(Dollars in thousands, except per share data)

 

Preferred

Equity

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Treasury

Stock

 

 

Total

Shareholders’

Equity

 

Balance at December 31, 2019

 

$

17,328

 

 

$

161

 

 

$

124,582

 

 

$

313,364

 

 

$

(14,513

)

 

$

(1,975

)

 

$

438,947

 

Cumulative-effect adjustment

 

 

 

 

 

 

 

 

 

 

 

(8,719

)

 

 

 

 

 

 

 

 

(8,719

)

Balance at January 1, 2020

 

$

17,328

 

 

$

161

 

 

$

124,582

 

 

$

304,645

 

 

$

(14,513

)

 

$

(1,975

)

 

$

430,228

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,127

 

 

 

 

 

 

 

 

 

1,127

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,431

 

 

 

 

 

 

12,431

 

Purchases of common stock for treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(196

)

 

 

(196

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

332

 

Restricted stock units released

 

 

 

 

 

 

 

 

(469

)

 

 

 

 

 

 

 

 

469

 

 

 

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per

   share

 

 

 

 

 

 

 

 

 

 

 

(364

)

 

 

 

 

 

 

 

 

(364

)

Common-$0.26 per share

 

 

 

 

 

 

 

 

 

 

 

(4,164

)

 

 

 

 

 

 

 

 

(4,164

)

Balance at March 31, 2020

 

$

17,328

 

 

$

161

 

 

$

124,445

 

 

$

301,243

 

 

$

(2,082

)

 

$

(1,702

)

 

$

439,393

 

 

Continued on next page

 

See accompanying notes to the consolidated financial statements.

- 6 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (Continued)

Three months ended March 31, 2020 and 2019

 

(Dollars in thousands, except per share data)

 

Preferred

Equity

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Treasury

Stock

 

 

Total

Shareholders’

Equity

 

Balance at December 31, 2018

 

$

17,328

 

 

$

161

 

 

$

122,704

 

 

$

279,867

 

 

$

(21,281

)

 

$

(2,486

)

 

$

396,293

 

Cumulative-effect adjustment

 

 

 

 

 

 

 

 

 

 

 

(710

)

 

 

 

 

 

 

 

 

(710

)

Balance at January 1, 2019

 

$

17,328

 

 

$

161

 

 

$

122,704

 

 

$

279,157

 

 

$

(21,281

)

 

$

(2,486

)

 

$

395,583

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

11,521

 

 

 

 

 

 

 

 

 

11,521

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,510

 

 

 

 

 

 

5,510

 

Reclassification of income tax effects

 

 

 

 

 

 

 

 

 

 

 

2,783

 

 

 

(2,783

)

 

 

 

 

 

 

Purchases of common stock for treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(193

)

 

 

(193

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

182

 

 

 

 

 

 

 

 

 

 

 

 

182

 

Restricted stock units released

 

 

 

 

 

 

 

 

(362

)

 

 

 

 

 

 

 

 

362

 

 

 

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per

   share

 

 

 

 

 

 

 

 

 

 

 

(364

)

 

 

 

 

 

 

 

 

(364

)

Common-$0.25 per share

 

 

 

 

 

 

 

 

 

 

 

(3,985

)

 

 

 

 

 

 

 

 

(3,985

)

Balance at March 31, 2019

 

$

17,328

 

 

$

161

 

 

$

122,524

 

 

$

289,111

 

 

$

(18,554

)

 

$

(2,317

)

 

$

408,253

 

 

See accompanying notes to the consolidated financial statements.

- 7 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in thousands)

 

Three months ended

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

1,127

 

 

$

11,521

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,973

 

 

 

2,103

 

Net amortization of premiums on securities

 

 

562

 

 

 

528

 

Provision for credit losses

 

 

13,915

 

 

 

1,193

 

Share-based compensation

 

 

332

 

 

 

182

 

Deferred income tax expense (benefit)

 

 

(276

)

 

 

951

 

Proceeds from sale of loans held for sale

 

 

9,934

 

 

 

5,992

 

Originations of loans held for sale

 

 

(9,228

)

 

 

(5,011

)

Income on company owned life insurance

 

 

(465

)

 

 

(410

)

Net gain on sale of loans held for sale

 

 

(304

)

 

 

(182

)

Net (gain) loss on investment securities

 

 

(221

)

 

 

53

 

Net gain on other assets

 

 

(64

)

 

 

(49

)

(Increase) decrease in other assets

 

 

(31,708

)

 

 

1,471

 

Increase (decrease) in other liabilities

 

 

18,745

 

 

 

(2,984

)

Net cash provided by operating activities

 

 

4,322

 

 

 

15,358

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of available for sale securities

 

 

(44,812

)

 

 

(7,681

)

Purchases of held to maturity securities

 

 

(1,364

)

 

 

(4,466

)

Proceeds from principal payments, maturities and calls on available for sale securities

 

 

13,847

 

 

 

25,390

 

Proceeds from principal payments, maturities and calls on held to maturity securities

 

 

13,827

 

 

 

12,842

 

Proceeds from sales of securities available for sale

 

 

20,257

 

 

 

4,948

 

Net loan originations

 

 

(27,029

)

 

 

(24,361

)

Purchases of company owned life insurance, net of proceeds received

 

 

(7

)

 

 

(24

)

Proceeds from sales of other assets

 

 

427

 

 

 

250

 

Purchases of premises and equipment

 

 

(1,196

)

 

 

(575

)

Net cash (used in) provided by investing activities

 

 

(26,050

)

 

 

6,323

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

231,510

 

 

 

141,930

 

Net decrease in short-term borrowings

 

 

(166,000

)

 

 

(182,200

)

Purchases of common stock for treasury

 

 

(196

)

 

 

(193

)

Cash dividends paid to common and preferred shareholders

 

 

(4,365

)

 

 

(4,187

)

Net cash provided (used in) by financing activities

 

 

60,949

 

 

 

(44,650

)

Net increase (decrease) in cash and cash equivalents

 

 

39,221

 

 

 

(22,969

)

Cash and cash equivalents, beginning of period

 

 

112,947

 

 

 

102,755

 

Cash and cash equivalents, end of period

 

$

152,168

 

 

$

79,786

 

 

See accompanying notes to the consolidated financial statements.

 

- 8 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1.)

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Financial Institutions, Inc. (the “Company”) is a financial holding company organized in 1931 under the laws of New York State (“New York”). The Company provides diversified financial services through its subsidiaries, Five Star Bank, SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the “Bank”). The Bank also has indirect lending network relationships with franchised automobile dealers in the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation of the consolidated statements of financial condition, income, comprehensive income, changes in shareholders’ equity and cash flows for the periods indicated and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s 2019 Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.

Allowance for Credit Losses

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. Topic 326 eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses based on historical experience, current conditions and reasonable and supportable forecasts. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the reserve for credit losses. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The Company adopted ASU 2016-13 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of retained earnings of $8.7 million upon adoption. The transition adjustment includes an increase in credit-related reserves of $9.6 million, $14 thousand, and $2.1 million for loans, held to maturity investment securities and unfunded commitments, respectively, net of the corresponding increase in deferred tax assets of $3.0 million.

The allowance for credit losses is evaluated on a regular basis and established through charges to earnings in the form of a provision for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

a.

Portfolio Segmentation (“Pooled Loans”)

Portfolio segmentation is defined as the pooling of loans based upon similar risk characteristics such that quantitative methodologies and qualitative adjustment factors for estimating the allowance for credit losses is constructed for each segment.  The Company has identified six portfolio segments of loans including Commercial Loans/Lines, Commercial Mortgage, Indirect Loans, Direct Loans, Residential Lines of Credit, and Residential Loans

The allowance for credit losses for Pooled Loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information.  Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s Loan Review function.

 

- 9 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1.)

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

b.

Individually Evaluated Loans

The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, troubled debt restructurings (“TDRs”), and other loans deemed appropriate by management.

 

c.

Held to Maturity (“HTM”) Debt Securities

The Company’s HTM debt securities are also required to utilize the current expected credit losses approach to estimate expected credit losses. The Company’s HTM debt securities included securities that are issued by U.S. government or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss.  The Company also carries a portfolio of HTM municipal bonds. The Company measures its allowance for credit losses on HTM debt securities on a collective basis by major security type. The estimate is based on historical credit losses, if any, adjusted for current conditions and reasonable and supportable forecasts. The Company considers the nature of the collateral, potential future changes in collateral values and available loss information.

 

d.

Available for Sale (“AFS”) Debt Securities

For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.

 

e.

Accrued Interest Receivable

Upon adoption of ASU 2016-13 and its related amendments on January 1, 2020, the Company made the following elections regarding accrued interest receivable:

 

Presenting accrued interest receivable balances separately within another line item on the statement of financial condition.

 

Excluding accrued interest receivable that is included in the amortized cost of financing receivables and debt securities from related disclosure requirements.

 

Continuing our policy to write off accrued interest receivable by reversing interest income. For commercial loans, the write off typically occurs upon becoming 90 days past due. For consumer loans, the write off typically occurs upon becoming 120 days past due. Historically, the Company has not experienced uncollectible accrued interest receivable on its investment securities. However, the Company would generally write off accrued interest receivable by reversing interest income if the Company does not reasonably expect to receive payments. Due to the timely manner in which accrued interest receivables are written off, the amounts of such write offs are immaterial.

 

Not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner, as described above.

- 10 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1.)BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

f.

Reserve for Unfunded Commitments

The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized for commitments unconditionally cancellable by the Company. The Unfunded Reserve is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized as a provision for credit loss expense in the consolidated statements of income. The Unfunded Reserve is determined by estimating expected future fundings, under each segment, and applying the expected loss rates. Expected future fundings are based on historical averages of funding rates (i.e., the likelihood of draws taken). To estimate future fundings on unfunded balances, current funding rates are compared to historical funding rates.

Operating, Accounting and Reporting Considerations related to COVID-19

The COVID-19 pandemic has negatively impacted the global economy, including our operating footprint of Western and Central New York. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

 

Accounting for Loan Modifications - The CARES Act provides that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

 

Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA.

 

Mortgage Forbearance - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance.

Also, in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

 

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.

 

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

 

Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

Effective March 23, 2020, for consumer customers, the Bank will be waiving early CD penalty fees for withdrawals up to $20,000 (limited to one penalty-free withdrawal per CD account); eliminating all insufficient funds (overdrafts) and returned item fees; eliminating all Pay by Phone fees; waiving all late fees; offering the opportunity for monthly mortgage, home equity loan or home equity line payment relief; offering the opportunity to defer unsecured consumer loans or lines of credit and secured consumer loans and lines of credit payments; and offering unsecured personal loans up to $5,000, up to 60 months at 2.95% APR subject to credit approval (additional terms and conditions may apply).

Business customers are being faced with challenging and unique circumstances. The Bank’s relationship bankers are highly skilled in providing tailored financial solutions designed to meet the specific, individual needs of each business and they are actively reaching out to each business customer to understand how the Bank can help, given each unique business circumstance.  

 

 

- 11 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1.)

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Reclassifications

Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Such reclassifications did not impact net income or shareholders’ equity as previously reported.

Subsequent Events

The Company has evaluated events and transactions for potential recognition or disclosure through the day the financial statements were issued and determined there were no material recognizable subsequent events.

Use of Estimates

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates relate to the determination of the allowance for credit losses, the carrying value of goodwill and deferred tax assets, and assumptions used in the defined benefit pension plan accounting.

Cash Flow Reporting

Supplemental cash flow information is summarized as follows for the three months ended March 31 (in thousands):

 

 

 

2020

 

 

2019

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

8,418

 

 

$

8,524

 

Cash paid for income taxes

 

 

1,000

 

 

 

1,248

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Real estate and other assets acquired in settlement of loans

 

 

646

 

 

 

 

Accrued and declared unpaid dividends

 

 

4,259

 

 

 

4,350

 

Decrease in net unsettled security purchases

 

 

 

 

 

1,473

 

 

Recent Accounting Pronouncements

In April 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. With respect to Topic 815, Derivatives and Hedging, ASU 2019-04 clarifies that the reclassification of a debt security from Held to Maturity (“HTM”) to Available for Sale (“AFS”) under the transition guidance in ASU No. 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, would not (1) call into question the classification of other HTM securities, (2) be required to actually designate any reclassified security in a last-of-layer hedge, or (3) be restricted from selling any reclassified security. As part of the transition of ASU 2019-04, entities may reclassify securities that would qualify for designation as the hedged item in a last-of-layer hedging relationship from HTM to AFS; however, entities that already made such a reclassification upon their adoption of ASU 2017-12 are precluded from reclassifying additional securities. The Company did not reclassify any securities from HTM to AFS upon adoption of ASU 2017-12. The Company elected to early adopt the amendments to Topic 815 in December 2019, resulting in the reclassification of $26.2 million of qualified investment securities from HTM to AFS. With respect to Topic 326, Financial Instruments - Credit Losses, ASU 2019-04 clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to Topic 825, Financial Instruments, on recognizing and measuring financial instruments, ASU 2019-04 addresses the scope of the guidance, the requirement for remeasurement under ASC 820 (Fair Value Measurement) when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. The amendments to Topic 326 and the amendments to Topic 825, under ASU 2019-04, were adopted as of January 1, 2020 and did not have a significant impact on the Company’s financial statements.

 

 

- 12 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(2.)EARNINGS PER COMMON SHARE (“EPS”)

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS (in thousands, except per share amounts).

 

 

 

Three months ended

March 31,

 

 

 

2020

 

 

2019

 

Net income available to common shareholders

 

$

762

 

 

$

11,156

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Total shares issued

 

 

16,100

 

 

 

16,056

 

Unvested restricted stock awards

 

 

(4

)

 

 

(3

)

Treasury shares

 

 

(90

)

 

 

(123

)

Total basic weighted average common shares outstanding

 

 

16,006

 

 

 

15,930

 

Incremental shares from assumed:

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

 

 

Vesting of restricted stock awards

 

 

63

 

 

 

48

 

Total diluted weighted average common shares outstanding

 

 

16,069

 

 

 

15,978

 

Basic earnings per common share

 

$

0.05

 

 

$

0.70

 

Diluted earnings per common share

 

$

0.05

 

 

$

0.70

 

 

For each of the periods presented, average shares subject to the following instruments were excluded from the computation of diluted EPS because the effect would be antidilutive:

 

Stock options

 

 

 

 

 

 

Restricted stock awards

 

 

2

 

 

 

10

 

Total

 

 

2

 

 

 

10

 

 

- 13 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(3.)INVESTMENT SECURITIES

The amortized cost and fair value of investment securities are summarized below (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized